BU - Financial Statements & more Flashcards
Balance Sheet Facts
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-AKA Statement of Financial Position.
-Prepared at a point in time, “snapshot” on that date
-Items on personal balance sheets are reported at fair market value (FMV).
-Items on corporate balance sheets are reported at the lower of cost or FMV.
- Balance sheet equation: Assets = Liabilities + Net Worth
-Every asset of the balance sheet is a source for risk management.
-Assets are listed on the left side of the balance sheet, listed in order of liquidity
-Liabilities and net worth are listed on the right side
-Short-term liabilities are listed and subtotaled on top, then longer term liabilities are listed and subtotaled below short-term.
-Net worth is listed below long-term liabilities.
-Total liabilities = short-term + long-term liabilities
Statement of Cash Flow Facts
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-Reports cash inflow and outflows during reporting period
-Assists in reconciling ending cash from prior year with ending cash during reported period
-break cash into sources and uses
-Provides detail on whether cash was obtained from earning, investments, loan or gifts
Balance Sheet & Cash Flow
Time
Purpose
Measures
Starting Point
Ending Point
Balance Sheet:
Time: at a point in time
Purpose: financial position
Measures: assets, liabilities, shareholder equity
Starting Point: cash balance
Ending Point: retained earnings
Cash Flow:
Time: Period of Time
Purpose: Cash movements
Measures: increases and decreases in cash
Starting Point: Net income
Ending Point: cash balance
Four Basic types of financial ratios:
Liquidity ratios - ability to meet short term obligations
Activity ratios - relative efficiency of financial management
Profitability ratios - measure relative profitability
Debt ratios - ability to meet long term obligations
**Liquidity ratios (3)
Current ratio = Current assets/current liabilities
Quick Ratio= (Current assets - inventories)/current liabilities
Working capital = current assets - current liabilities
Activity ratios (4)
Inventory turnover= COGS/Avg Inventory
Days to Sell Inventory = 365/Inventory turnover
Acct’s Receivable turnover = sales (credits)/ avg. accounts receivable
Receivable collection period = 365/accounts receivable turnover
Profitability ratios (4)
Gross Profit margin = Gross profit/sales
operating profit margin = operating income/revenue
return on assets= EAT/total assets
Return on Equity = EAT/equity
**Debt ratios (3)
Debt to equity= total long-term debt/equity
Times interest earned= EBIT/interest expense
Debt Ratio = total debt/total assets
Emergency Fund Ratio
Emergency fund ratio = monetary assets/monthly living expenses
Target: 3-6+months
1 income = at least 6 months
2 income = at least 3 months
Emergency Fund can include:
Must be liquid and marketable:
cash
checking and saving accounts
money market mutual funds
T-bills
CDs
Cash value life insurance
Lines of credit
Home equity loans
What does FDIC stand for?
Federal Deposit Insurance Corporation
What does the FDIC do?
independent agency created by Congress to maintain stability and public confidence in the nation’s financial system
applies to all clients who hold bank products in their savings and investment portfolios
FDIC Deposit Insurance Coverage Limits
$250,000 PER OWNER…
Single Accounts - Owned by one Person - per owner
Joint Accounts - owned by 2+ persons - per co owner
Certain Retirement accounts - IRAs - per owner
Revocable Trusts - per owner per unique beneficiary
Corporation, partnership and Unincorporated assoc - per entity
Irrevocable Trusts - per noncontingent interest of each unique beneficiary
Employee benefit plans accounts - per noncontingent interest of each plan beneficiary
Government Accounts - per official
What is something that is not insured by the FDIC?
Money market mutual fund (MF)
Credit Protection Laws
Exist to support consumers on credit related matters
- Consumer Credit Protection Act - right to know costs and terms of credit
- Equal Credit Opportunity Act - right to fair opportunity to obtain credit, borrower must receive a response within 30 days after application
- Fair credit reporting act - right to know what’s in your credit file
- Fair Credit Billing Act - right to have billing mistakes resolved
- Fair Debt Collection Practices Act - right to be protected from collection agencies
- Truth in Lending Act - requires lenders to disclose the true cost of consumer credit, explaining all charges, terms and conditions. Consumer must be provided the total finance charge and APR
Types of Bankruptcies
Chapter 7 - liquidation type, individuals & business, unsecure debt is eliminated - with exceptions
Chapter 13 - repayment type, individuals, pay back debt through plan
Chapter 11 - reorganization, pay back over time, business but can accommodates those who exceed chapter 13 limitations or lack of regular income
Chapter 7 Bankruptcy
Most debts are discharged after 115 days from the date of filing for Chapter 7, but certain obligations must still be repaid:
child support,
alimony,
income taxes less than three years past due,
student loans, and
secured debt.
Chapter 13 Bankruptcy
Under Chapter 13 a debtor will pay more every month to make payments on their overdue debt along with their current monthly payments.
To be eligible to file for Chapter 13 bankruptcy, an individual must have no more than $419,275 in unsecured debt, such as credit card bills or personal loans. They also can have no more than $1,257,850 in secured debts, which includes mortgages and car loans.
Automatic Stay
is issued when you file for chapter 7 or 13 and it stops creditors from attempting to collect what is owed to them
Does not apply to alimony, child support or criminal suits
Bankruptcy Overview
Define Credit Score
tells lenders about a person’s creditworthiness - how likely they are to pay back a loan based on credit history
FICO Scores calculations:
Pat Always Lets Nehemiah Catch
payment history (35%)
amounts owed (30%) - the amount one owes vs. credit available
length of credit history (15%)
new credit (10%)
credit mix (10%)
FDIC Notes
Separate the ownership categories first
Note that for joint account interests for each owner’s joint account holdings are aggregated and that owner has $250k total at that bank for joint interests.
$2MM max protection if a person had the 8 different types of accounts.
Debt resolution Rule
Financial planners use the debt resolution rule to help control debt obligations. These exclude borrowing associated with education and home financing.
The debt resolution rule forces you to repay all your outstanding debt obligations every 4 years.
To assess a borrower’s ability to repay, lenders look at 3Cs
Character - how the borrow has handled themselves in previous financial dealings
Capacity - ability to repay debt - also looking at future commitments
Capital - financial strength, usually measured by net worth
Long term debt coverage below X is not financially desirable
2.5
three major components to the privacy requirements of the Gramm-Leach Bliley Financial Modernization Act of 1999 (GLB Act)
The Financial Privacy Rule: regulates how financial institutions may gather and subsequently disclose personal financial information to others. This rule also places restrictions on the use of information that companies receive from third parties, whether these companies are financial institutions or not.
The Safeguards Rule: requires financial institutions to create and implement procedures to protect the personal financial information they obtain from customers. This rule also applies to companies, such as credit bureaus, who receive this information directly from other financial institutions.
The Pretexting Provisions: protect individuals whose personal financial information has been obtained by others under false pretenses.
Illiquid Assets
assets not available to meet income or other monetary needs because they are not easily liquidated
